Multiple choice

Devaluation will help in improving the balances of payments of a country if the sum of the elasticity of demand for imports and exports is

  1. Zero

  2. Equal to one

  3. Less than one

  4. More than one
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The Marshall-Lerner condition states that devaluation will improve the balance of payments only if the sum of the price elasticities of demand for exports and imports is greater than one. If this sum is less than or equal to one, devaluation worsens the BOP or has no effect. This is because devaluation makes exports cheaper and imports dearer, improving the trade balance only if quantity responses are sufficiently strong.

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